Despite bad monsoons and inflationary pressures in the domestic market, Harish Bhat, the recently-appointed managing director and chief executive officer of Tata Global Beverages, expects continued robust performance in FY13. In an interview, he tells Priya Kansara Pandya the company’s strong iconic brands and innovation efforts will help on this front. Edited excerpts:
What are the reasons for a huge jump in the consolidated operating profit margin during the June quarter?
Our operating profit margin has improved on account of four factors. Underlying volume growth has been good in most geographies with India seeing 9.5 per cent growth, while the US, Canada and the UK have seen lower single digit volume growth (under five per cent). All the three regions together contribute around 87 per cent of our total revenues. Secondly, we have also undertaken price hikes in these regions. Our focus on operating efficiencies has also helped. Lastly, there has been the foreign exchange translation impact, which, of course, has benefitted revenues more than profits.
How will FY13 pan out as the company’s high exposure to slow-growing developed markets is seen as a major hurdle to sustainability of good performance?
I would not like to give any kind of guidance, but margins will continue to remain robust. High exposure to developed markets may impact the rate of profit growth, but not margins directly. Margin improvement is driven by our operating efficiencies, buying costs and ability to price our brands.
Also, I would like to add that Eight O’ Clock coffee (20 per cent of overall revenues) witnessed enhanced profit margins during the June quarter. Demand is showing gradual improvement, but raw material prices have shown significant improvement. Coffee prices have come off significantly from higher levels, compared to tea. The coming quarters will show increasing benefits of that.
How do you see tea prices moving, going forward?
Assam and Kerala have received a fair monsoon. Thus, drought is not going to have a major impact on tea production in India. Having said that, tea prices in India have shown varying trends. We have seen firm price trends in north Indian teas and some softness in the South Indian variety. Firm price trend of premium Assam tea is going to continue in the future. But, our brands are strong and we have proven time and again that our brands can absorb that cost increase. If commodity prices move up further, it’s a fair decision to go for price hikes, but these will be only in the three-five per cent range and not 15-20 per cent. In the short term, there may be a marginal impact on volume growth. But it’s better to lose volume marginally than affect profitability.
But do you think price hike and slowdown will lead to a shift in consumption to regional brands?
There is always a possibility that consumers can downtrade from larger brands to local players. In the June quarter, we have not seen evidence of such a shift. But I would also like to add any downtrend could happen faster in other categories like soaps, toothpastes and shampoos but relatively less in beverages as usually consumers are used to a certain kind of taste and blends. But it can always happen. We are continuously watchful for that.
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How is the competitive scenario in India and abroad? Where is price hike implementation easier?
It’s more difficult to undertake price hikes in the developed world, compared to emerging markets. Cost increases in developed markets are also low and underlying rate of inflation is three-four per cent compared to 9-10 per cent in a country like India. Moreover, people in developed markets buy more premium products. Thus, volume growth is not the only way to profitable growth.
Where is advertising expenditure heading for given the competitive intensity?
Competitive intensity is certainly going up. Our adspends to sales will remain stable though it will not decline from the current levels in the medium term.
What products will be the future growth drivers?
In the next five years, we want to achieve a better balance among the three beverages as we are not only a tea company. This means we would have more coffee and water in our portfolio, while the proportion of tea will come down from the current 70 per cent. Similarly, coffee will go up from 20 per cent to 30 per cent and water will jump from one-two per cent to 5-10 per cent (we aim even higher than that) of overall revenues. We would keep our innovative efforts on in each of the three beverages like we did recently in tea (Tetley Chai Latte), water (Tata Water Plus, Tata Gluco Plus) and Coffee (Eight O’Clock’s alliance with Green Mountain Coffee Roasters Inc, a leader in specialty coffee and single serve brewing systems in North America).
Please provide a fresh update on Starbucks joint venture?
Both parties are working very closely to make the launch happen. The first few stores will be launched in FY13.